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Remi Chevalier, partner, Chevalier and Sciales

The AIFMD and third-country managers

Agreement after some 18 months of debate and negotiation on the Directive on Alternative Investment Fund Managers, which will create a single market for the marketing of alternative funds to professional investors throughout the European Union, offers new opportunities for Luxembourg as a fund domicile and servicing centre, say Rémi Chevalier (pictured) and Olivier Sciales, partners with Chevalier and Sciales in Luxembourg.

Two-year transition period

The text approved by the European Parliament on November 11 introduces a two-year transition period after the final deadline for transposition of the directive into member states’ national law before non-EU alternative fund managers performing management and/or marketing activities within the EU as well as EU managers of non-EU funds can become eligible for a ‘passport’ to access member states’ markets.
The European Securities and Markets Authority (Esma, which succeeds the Committee of European Securities Regulators) will have oversight authority, power to decide authorisation questions on which different EU regulators disagree, and a co-ordinating role in the exchange of information between national regulators.
The harmonised regulatory framework will coexist for a further three years with national private placement arrangements for alternative funds, which are set to be abolished at the end of the five-year period.
Application to all non-Ucits funds
The directive covers managers of all funds not covered by the Ucits directives on cross-border retail funds, whether open- or closed-ended, whatever their legal form and listing status, but excludes entities such as managers of family offices, holding companies, pension funds and securitisation SPVs.
With exemptions for smaller managers, the directive will apply to all European-based managers of alternative funds, whether the funds are domiciled or marketed within the EU or not; non-EU managers of EU-domiciled funds; and non-European managers marketing EU or non-EU funds within the union.
EU-based managers of non-EU funds
Article 34 of the directive stipulates that an EU manager of non-EU funds not marketed within the union must comply with the directive apart from its depositary and annual report requirements in relation to those funds.
Co-operation arrangements must be in place between the manager’s home regulator and that of the fund domicile to facilitate regulation of the manager and monitoring of systemic risk. As with other provisions regarding non-EU domiciled funds and managers, the Commission is to draw up a framework for co-operation arrangements with third countries, while Esma will draft guidelines on how these measures are to be implemented.
Under Article 35, EU managers may market non-EU funds (or EU-domiciled feeder funds invested in non-EU master funds) to EU professional investors subject to conditions including co-operation arrangements between the manager’s regulator and that of the fund domicile, compliance by the latter with Financial Action Task Force standards on money laundering and terrorist financing, and OECD-standard tax information exchange agreements (Tieas) between the fund domicile and the manager’s member state as well as all other EU countries in which the fund is to be marketed.
Notification of marketing intentions
An EU manager seeking to market a non-EU fund in its home market may do so on receipt of confirmation from the local regulator (a decision is due within 20 working days of the submission notifying its intention). Where the manager seeks to market the fund in other EU countries, the home regulator must transmit marketing notification to those states within 20 working days of receipt, and the manager may begin marketing once it has been notified of the transmission.
Member states may also – temporarily – continue to allow non-EU funds to be marketed by EU managers on their territory without a passport (Article 36) subject to depository arrangements equivalent to those stipulated for EU funds, co-operation arrangements with the fund domicile and certification of AML compliance.
Non-EU managers of EU-domiciled funds
Under Article 37, non-EU managers intending to manage or market EU-based alternative funds must receive prior authorisation from a “member state of reference”, which plays the same role as the home state of EU-based managers. They must appoint a legal representative in the member state of reference as a contact point and conduit for official correspondence with EU regulators and investors, and to carry out compliance functions.
The non-EU manager’s home jurisdiction must conclude regulatory co-operation arrangements with the member state of reference, the fund domicile and other EU countries where the funds are to be marketed, and meet money laundering and tax information conditions.
The member state of reference is determined according to where the manager’s funds are domiciled (if within the EU) or where they will be marketed. If there are several possibilities, the manager may submit a request to all the member states that would qualify, which should determine the choice between them. Any disagreement on the designation of a manager’s member state of reference can be referred to Esma.
Where non-EU managers seek to market EU or non-EU funds within the European Union with a passport (Articles 38 and 39 respectively), the regulator of the member state of reference is subject to the same 20-working day deadline for a decision on marketing of the funds on its territory or transmission of marketing notification to other member states.
Article 39bis covers non-EU managers of funds domiciled in EU countries other than their member state of reference either directly or through a branch, while article 40 authorises EU member states to allow non-EU managers to market non-EU funds on their territory without a passport.
Non-EU managers targeting EU investors
Managers outside the EU that currently access European investors through national private placement regimes can continue to do so, subject to certain minimum requirements, for at least five years.
The draft directive upholds the principle that the European marketing passport should be available to non-EU managers and funds that accept the same or equivalent regulatory requirements as their EU counterparts and that the jurisdictions in which they are domiciled have co-operation arrangements and comply with money laundering and tax information exchange standards.
Unlike previous drafts, the final text makes no mention of “passive marketing”, but the preamble states that EU professional investors should remain free to invest on their own initiative in alternative funds regardless of where the manager or fund is based.
Implications of an EU or non-EU fund domicile
Under the directive, a Brazilian manager seeking to market a Cayman-domiciled fund to French pension schemes would probably adopt France as its member state of reference. In addition the Brazilian regulator, the CVM, would need a co-operation agreement with France’s AMF, as would Cima, the Cayman regulator, and both Brazil and Cayman would demonstrate their AML compliance as well as having Tieas in place with France.
Were the manager to offer French institutions a Luxembourg-domiciled SIF instead, the member state of reference – the manager’s de facto regulator for funds offered within the EU – might instead be Luxembourg. Accessing investors in other EU markets would be easier because no additional agreements with the fund domicile would be necessary.
The directive is expected to come into force at the beginning of 2011 and be transposed into national law within two years. Now its final form appears clear, non-EU managers can assess the best methods of accessing European investors up to 2018 and beyond, and the potential role for Luxembourg in that process.
Click here to download a copy of the Hedgeweek Luxembourg Hedge Fund Services 2010 special report


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